International Tax Series: Know the Basics of Entity Classification and Check-the-Box when Forming or Acquiring a Foreign Company

A U.S. person who plans to form or acquire an ownership interest in a foreign company should be aware of the following U.S. tax requirements. The Form 8832 check-the-box entity classification election can be filed to treat a foreign eligible entity as a pass-through entity for U.S. tax purposes. A foreign entity which is not on the U.S. list of per se foreign corporations is eligible to elect its classification for U.S. tax purposes on the Form 8832. A foreign entity on the U.S. list of per se foreign corporations is not eligible to make the election, and such foreign entity is required to be treated as a foreign corporation for U.S. tax purposes. The list of per se foreign corporations is provided in the IRS instructions to the Form 8832 and in Treas. Reg. Section 301.7701-2(b)(8).

A foreign eligible entity owned 100% by one person may elect to be classified as a foreign disregarded entity for U.S. tax purposes. A foreign eligible entity owned by two or more persons may elect to be classified as a foreign partnership for U.S. tax purposes. If the election is filed, the income of the foreign entity is taxable to the U.S. owner. If the election is filed, losses of the foreign entity are reportable on the owner’s U.S. federal income tax return subject to any applicable basis limitation for foreign partnerships.

The effective date of the Form 8832 check-the-box entity classification election cannot be earlier than 75 days prior to the date when the election is filed. The effective date of the Form 8832 check-the-box entity classification election cannot be later than 12 months after the date when the election is filed. In some circumstances, late filing relief may be available.

A U.S. person who owns 100% of a foreign disregarded entity is required to file the Form 8858 with the owner’s U.S. federal income tax return. A U.S. person who acquires or owns a 10% interest in a foreign corporation may be required to file the Form 5471 with the shareholder’s U.S. federal income tax return. A U.S. person who owns at least 10% or more than 50% of a foreign partnership may be required to file the Form 8865 with the partner’s U.S. federal income tax return.

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